China is Australia's largest export market. Australia predominantly exports iron ore to China. Meanwhile, China exports consumer goods such as computers to Australia. China has a comparative advantage in producing computers. Australia has a higher opportunity cost of producing computers. Australia's comparative advantage is partly as a result of the ease of access and ready availability of its iron ore. Which of the above statements are true: Only 1 is true. Only 2 is true. Both 1 and 2 are true. Both 2 and 3 are true. All three are true.
Question
China is Australia's largest export market. Australia predominantly exports iron ore to China. Meanwhile, China exports consumer goods such as computers to Australia.
China has a comparative advantage in producing computers. Australia has a higher opportunity cost of producing computers. Australia's comparative advantage is partly as a result of the ease of access and ready availability of its iron ore. Which of the above statements are true:
Only 1 is true.
Only 2 is true.
Both 1 and 2 are true.
Both 2 and 3 are true.
All three are true.
Solution
All three are true.
The first statement is true because China, known for its manufacturing capabilities, has a comparative advantage in producing computers. This means China can produce computers at a lower opportunity cost than Australia.
The second statement is true because Australia has a higher opportunity cost of producing computers. This means that Australia has to give up more of other goods to produce computers compared to China.
The third statement is true because Australia's comparative advantage in exporting iron ore is partly due to the ease of access and ready availability of its iron ore resources. This means Australia can produce iron ore at a lower opportunity cost than other goods.
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